Banks on recovery spree from small businesses; stop throwing good money after bad to defaulting MSMEs

Credit and Finance For MSMEs: Stressed assets in the MSME sector have mounted in recent years, leading to a sudden hike in MSME-related cases being resolved by recovering dues via legal routes, cutting lending rates, and sometimes giving them more time to repay. The option of recovery was exercised in 35.73 per cent of cases resolved for the half-year ended March 2019, which means that the recovery of dues was carried out via legal routes. The lack of demand, shortage of working capital, non-availability of raw materials, power shortage, marketing problems, labour problems, management problems, and equipment problems have also led to the closure of some enterprises, said Nitin Gadkari, Ministry of Micro, Small and Medium Enterprises in a reply to a question in Lok Sabha.

RBI had issued guidelines on ‘Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises’ to banks, advising them to identify incipient stress in the MSME accounts and refer it to the committees formed under the Framework for suitable Corrective Action Plan via rectification, restructuring, and recovery. 

Under rectification, the banks provide additional finance to the borrower, while under restructuring, the borrower’s loan repayment schedule is extended and the interest rate is reduced to ease the repayment pressure. In recovery, lenders pursue legal routes to recover dues.

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Though, rectification is the preferred Corrective Action Plan of the committees, the number of cases resolved by restructuring skyrocketed by 15 folds on-year by the end of the half-year ending March 2019. The proportion of cases resolved through recovery also surged by 9.2 per cent during the same duration. 

To facilitate the meaningful restructuring of stressed MSMEs, the government had also decided to permit a one-time restructuring of existing loans of MSMEs classified as ‘standard’ without a downgrade in the asset classification.

The stress on the MSME sector has grown despite various government’s scheme to provide cushion to the sector. To enhance competitiveness and sustainability of the MSME sector, the government has introduced schemes such as credit linked capital subsidy and technology up-gradation scheme, credit guarantee scheme, interest subvention scheme, micro and small enterprises-cluster development programme, etc.